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Top 10 Strategic Considerations When Drafting Dispute Resolution Clauses in Cross-Border Contracts

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Top 10 Strategic Considerations When Drafting Dispute Resolution Clauses in Cross-Border Contracts Latham & Watkins International Arbitration Practice Number 1551 | July 15, 2013 Top 10 Strategic Considerations When Drafting Dispute Resolution Clauses in Cross-Border Contracts Parties to the growing number of cross-border transactions should anticipate the inevitable cross-border disputes and specify the methods for dispute resolution in advance. International arbitration offers two key advantages compared to litigation for resolving cross-border disputes — enforcement and neutrality. First, international arbitration awards are more readily enforced. 148 countries are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention, which provides for the recognition and enforcement of arbitral awards, with limited grounds for challenge. In contrast, court judgments are not easily recognized beyond their jurisdictions and thus may result in a pyrrhic victory if they cannot be enforced. The United States is not a party to any treaty providing for the enforcement of US court judgments abroad. The second advantage to international arbitration is neutrality. Most companies do not want to submit their disputes to foreign courts. International arbitration allows the parties to resolve their disputes in a neutral forum — one acceptable to parties from different countries or with different legal and cultural backgrounds. While no one wants to think about a dispute when entering into a deal, well-crafted dispute resolution clauses give corporations a tactical advantage in the event that a dispute arises. Conversely, the lack of attention to the negotiation of a suitable dispute resolution clause can leave a corporation adversely exposed should a dispute develop. Below are the top 10 issues to consider when drafting a dispute resolution clause in a cross-border contract. 1. Governing Law: Every cross-border contract should contain a governing law clause. Otherwise, the parties will waste significant time and costs fighting the issue once a dispute arises. Choice of law clauses should specify the substantive law of the contract, and parties should consider whether a separate law governing the arbitration agreement needs to be specified. Parties should also consider whether to authorize the tribunal to act as amiables compositeurs, giving the tribunal the right to base a decision on fairness or equity rather than law. However, given the inherent uncertainties in application, parties should be extremely cautious to grant such broad and uncertain powers. 2. Rules: Typically parties prefer to adopt an arbitration institution’s rules and recommended clause because this saves the time and expense of developing an ad hoc procedure. Institutional arbitration — sometimes described as “administered” arbitration — can offer better case management and more Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Under New York’s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York’s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY 10022-4834, Phone: +1.212.906.1200. © Copyright 2013 Latham & Watkins. All Rights Reserved. effective procedures because the rules of well-established arbitral institutions have evolved from years of practical application and revisions. Although numerous arbitral institutions have particular geographic or industry focuses, the most frequently used arbitral institutions are: – American Arbitration Association’s International Centre for Dispute Resolution (ICDR) – International Court of Arbitration of the International Chamber of Commerce (ICC) – London Court of Arbitration (LCIA) – Hong Kong International Arbitration Centre (HKIAC) – Singapore International Arbitration Centre (SIAC) – Chinese International Economic Trade Arbitration Commission (CIETAC) If parties prefer a non-administered arbitration, the UNCITRAL Arbitration Rules are a good option. Using an institution’s standard clause avoids any ambiguity regarding the scope of disputes which are to be decided by arbitration, the name of the arbitral institution whose rules have been adopted and who is to administer the arbitration. 3. Arbitrators: One or three arbitrators are appropriate, depending on the amount in dispute and the complexity of the case. One arbitrator is usually cost effective if the amount in dispute is less than US$10-15 million, but if the amount in dispute is impossible to predict with any certainty, the number of arbitrators can be decided by the arbitral institution once the dispute arises. When drafting multi- party contracts, parties should carefully draft an arbitration clause to avoid a situation in which each party appoints one arbitrator, resulting an even number of arbitrators. If the parties wish to choose a method for selecting the arbitrators that differs from the method provided in the selected arbitral rules, the clause may set forth how the arbitrators should be selected. The parties also may wish to require that the arbitrators have specific qualifications, such as at least 10 years of experience with technology-related disputes. Requiring too many qualifications, however, can significantly reduce the available pool of qualified arbitrators. 4. Venue: The legal place, or “seat”, of the arbitration determines the lex arbitri, or arbitration law, and the courts of that jurisdiction will have a supervisory function over the arbitration. Therefore, parties should select a venue in a country which is a signatory to the New York Convention and is known to respect the arbitration process. The parties should also consider the logistical issues, such as the availability of support services (e.g., appropriate hearing facilities, hotel accommodation, transcribers and interpreters), visa requirements, restrictions on the choice of counsel, and the location of the witnesses and parties. The most common venues include New York, London, Paris, Zurich, Geneva, Hong Kong and Singapore. 5. Language: Contracts between parties who use different languages should specify the arbitration language — most commonly English. In the absence of a provision designating the language of the arbitration, the arbitrators will decide, frequently selecting the language of the contract. Selecting more than one language will add significant time and costs and is thus discouraged, although witnesses can always testify in their native language, with the aid of a translator. 6. Negotiation/Mediation Before Arbitration: A tiered clause will provide for negotiation or mediation before a party can file for arbitration. Explicitly requiring negotiation or mediation may be helpful for a party concerned that broaching the subject of settlement could be viewed as a sign of weakness, or for parties in a long-term contract. But a tiered clause can also delay the start — and resolution — of a dispute. Even if negotiation or mediation is not expressly required, the parties are always free to try Latham & Watkins Client Alert No. 1551 | July 15, 2013 | Page 2 to resolve their dispute through these methods. Thus, parties should consider whether a tiered dispute resolution process is necessary or helpful for this type of contract. Although a tiered clause frequently requires senior executives to meet to try to resolve a dispute, this scenario typically benefits the smaller company, putting that party on equal footing at the negotiating table. Requiring executives to try to resolve a dispute, however, may not be the best use of time for a large company executive, who would much prefer to delegate this responsibility. 7. Discovery/Disclosure: The method for obtaining and submitting evidence in an international arbitration falls within the tribunal’s discretion, unless the parties agree otherwise. National rules of civil procedure and evidence do not apply. To address the divergent approaches to disclosure between the common law and civil law systems, parties frequently adopt, in addition to the selected arbitral rules, the International Bar Association (IBA) Rules on the Taking of Evidence in International Commercial Arbitration, which uses a hybrid approach. Even when the IBA Rules are not formally adopted, however, they have become a point of reference. US practitioners will find the scope of disclosure in an international arbitration is far narrower than in US discovery, and depositions are rarely used in international arbitration. Thus, to the extent any party wants to utilize a particular method for obtaining and submitting evidence, the method should be specified in the clause. 8. Interim Measures: Notwithstanding the agreement to arbitrate, most arbitral rules provide that the parties have the right to obtain preliminary relief — such as a temporary restraining order or a preliminary injunction — from a national court before the tribunal is constituted. Certain arbitral rules also provide a method to
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